Insights and Opinions

Sunday, April 8, 2007

Think Like An Investor: Developing the Right Mindset for Successful Fundraising

In a perfect world, the most creative and innovative ideas would have an easy time getting funded, while all of the flawed business concepts would quickly fall by the wayside. Unfortunately, we don’t live in a perfect world: we live in Southern California, a place where even the “next big thing” can have trouble lining up money.

Probably the most important thing to remember is that investors are approached hundreds of times a year (if not more) by new companies, which puts them in the driver’s seat when it comes to selecting companies for their portfolios. Because of this dynamic, the reality is that most people with money to put into start-up ventures actually don’t focus on what they like about a business, they focus more on what they don’t like. Essentially, it is most efficient for them to find any reason to say “no” to requests for funding. Don’t give them one! Technology entrepreneurs could save themselves a lot of time – and heartache – if they followed a few rules before they approached angel investors and venture capitalists:

1 – Target the right investors

As Polonius once said to Laertes, “to thine own self be true.” Shakespeare may have written these words more than 400 years ago, but they carry a lot of weight for today’s technology innovators. Before you start calling Clearstone and Kleiner Perkins, take a hard look at who you really are. There are few things less productive than contacting the wrong investors, so you need to be realistic about where you are in your company’s lifecycle. If you have a breakthrough technology, a complete team, dozens of paying customers and a steady revenue stream, approaching the big boys might be a good idea. On the other hand, if you’re just starting out with some wires and a soldering iron, it might be better to hit up your crazy uncle in Bakersfield for some seed money.

2 – Tailor your approach to your audience

Once you know who your audience is, talk to them in a way that caters to their needs. It may sound self-evident, but I’ve been in far too many meetings where an entrepreneur has used a presentation that is completely irrelevant. Different kinds of investors need different information. For a “friends and family” round, the most important things are the investor’s personal connection to your product and your coming across as committed and sincere. When it comes to major VC firms, however, the standards for investment are considerably higher.

3 – Get face time

There is no substitute for an in-person meeting with a potential funder. Emailing a business plan to an investor will have a success rate of approximately zero, and even if it’s accompanied by a well-written executive summary, the chances of an entrepreneur getting in the same room with an angel or VC are still pretty close to nada. No matter how good your idea is, or how good your proposal may be, you need to have an “in” with a potential funder. Of course, that’s easier said than done. The best way to do this successfully is to mine your personal and professional networks to see if you have a friend-of-a-friend who can make an introduction for you. Think about who your accountant or your lawyer may know, and tapping into college alumni networks can also be a good way to look for connections. Only after you contact a potential investor – and set up a meeting – should you forward your business plan and executive summary.

4 – Be prepared

Before you meet with a funder know exactly what you want to get out of the meeting. Ask the investor what he or she wants to talk about. Once this is established, create a PowerPoint presentation with four or five “killer” slides and 15-20 other slides to which you can refer if necessary. In my experience, while PowerPoint can be a great tool, it can often do more harm than good. Given that investors see hundreds of presentations a year, they have gotten very good at knowing what they want to hear and what they want to ask. So, DO NOT spend the meeting dragging investors through a whole presentation if you are getting signals that they would like to do more of a Q&A type meeting. Lead into the meeting with the “killer” slides and then be flexible about how to spend the rest of your time.

5 – Avoid business plans

It may sound counterintuitive, but in most cases a detailed business plan will not help further your cause. Why? Because no one will read it! Not only do plans take too long to write, but they have a way of becoming irrelevant and out-of-date even as they are being prepared. In addition, they open up a lot of questions that could lead an investor to disagree with certain points – and give them a reason to turn down your request for funding. Remember that the goal of a first meeting isn’t to overwhelm investors with reams of information: it’s to get a second meeting scheduled. And, the goal of the second meeting is to get a third meeting, and so on. So, you should always keep a keen eye (and ear) out for what information they need, as opposed to what information you want to present.

There are no guaranteed ways to raise funds, but there are plenty of ways to take yourself out of the running even before you begin to look for investment. By following some basic guidelines, technology start-ups can improve their chances of attracting the attention of angels and VCs. All it takes is a concerted effort to take the word “no” out of their vocabulary.

Matt Ridenour is Managing Director of Momentum Venture Management, a Los Angeles-based firm that helps early-stage companies achieve early business results and develop credibility in order to get funding and transform their ideas, technologies and products into sustainable, successful businesses. For more information, please visit www.mvmpartners.com.